The recession fearmongers might have it dead wrong

We recently
detailed why some economists are spooked about the economy.

Harvard professor Larry Summers also noted that the
consensus of economists has
failed to forecast a recession one year in advance
in post-war America. So, once again, we may not know for sure
until we are really close to an economic downturn, or even in
one.

However, it doesn't exactly look like we're there.

If you were, however, trying to build a case that we're near
recession, the manufacturing sector
is where you'd start.

It's a services economy

"We are seeing questions come up as to whether a manufacturing
recession means that the broader economy is destined to follow
suit," wrote Gluskin Sheff's David Rosenberg in a note to clients
on Thursday.

Rosenberg's simple answer? Most likely
not. Moreover, manufacturing is not a good bellwether
for the economy, making up just 12% of total economic
output, down from about 30% in the 1950s.

As it currently stands, the services sector makes an
outsized contribution to GDP, and this chart from Deutsche Bank
shows just how differently it's faring:Deutsche Bank

"Can 14% drag down the remaining 86% of the economy?" asked
Deutsche Bank's Torsten Sløk in a recent note. "So far,
there are not many signs of that happening."

Consumer spending makes up more than two-thirds of GDP, and
judging by the advance estimate of third-quarter
GDP we got on Friday, consumer spending is still keeping the
economy afloat.

The headline print for economic growth showed a 1.5%
quarterly increase, slower than the second quarter but still
indicating expansion, while consumer spending increased by 3.2% —
a slowdown from the second quarter but still healthy.

Add this drag back, however, and we're looking at on-trend
economic growth, according to Chris Rupkey at Bank of
Tokyo-Mitsubishi. "2.9% (1.5 + 1.4) is about as high a growth
rate that we think is going to be sustainable in the next few
years ... 2 percent growth is the new gold standard
for the economy."

Manufacturing recession

The manufacturing sector, meanwhile, has
entered into its own recession this year, while the ISM
Manufacturing purchasing-manager's index
(PMI) is hovering above 50, the red borderline below
between expansion and contraction.

When the index for October is released on Monday, economists
forecast it will be smack on the border, according to
Bloomberg.

In
Texas, a manufacturer said business had "fallen off a cliff,"
as no one knew when or by how much oil prices would rebound
after the crash that has hurt the state's economy. The
New York Fed recently indicated that current business
activity in the region is near a seven-year low.

What it takes for a recession

The IMF and others have forecast that the global economy
won't have the same growth rates it enjoyed before the 2008
financial crisis. But remember that by the textbook, it
would take two straight quarters of negative growth to
declare a recession.

Another thing going for the economy, and for
consumers, is the labor market.

And so while the pace of hiring has presented something of
a puzzle to economists (perhaps indicating that there
aren't enough qualified workers to hire), initial jobless
claims — or first-time filings for government unemployment
benefits — keep collapsing to new lows.

The
four-week average — which smooths out the weekly volatility
— is at the lowest since 1973.FRED

On Thursday, the four-week average fell to 259,250 from the
previous week.

Pantheon Macroeconomics' Ian Shepherdson wrote to clients,

It's hard to believe that the trend in claims has stepped
down to a new cycle low of about 260K from the
low 270s, but each passing week adds more
support to the idea. If these numbers can
besustained, the data would
be hugely supportive of our view that markets
and media are overweighting the
macro importance of the (very real) slowdown in
manufacturing, and ignoring the strength of the
services sector, which is five-and-a-half times
bigger.

On Tuesday, we wrote that the Fed's statement was probably
going to say
nothing new.

But the Fed
did end up surprising markets not because it raised
rates, but because the Fed made explicit reference to its "next
meeting" at which it might move to raise rates.

If the Fed manages to raise rates (on Friday afternoon, Fed
fund futures markets reflected a 50/50 coin toss), economists and
market participants won't be able to say the Fed didn't
say so: It doesn't look like the economy
is about to crash.